Today, Type 1 diabetes patients pay twice as much for insulin as they did in 2012. This is outrageous — but drug companies aren’t to blame. The problem is a dysfunctional supply chain that benefits everyone except patients.

In today’s system, insurers hire third-party firms, known as pharmacy benefit managers, to manage drug plans. These PBMs negotiate with drugmakers and have the power to decide which drugs are covered by each plan. Each year, manufacturers dole out $150 billion in rebates and discounts as a result of these negotiations. But patients rarely see these savings at the pharmacy counter.

With insulin, discounts are massive; PBMs often secure discounts of 70 percent or more. As a result, the net price of insulin — the amount manufacturers keep after discounts — has stagnated or fallen in recent years, even as list prices have increased. Manufacturers are raising list prices so they can offer bigger discounts to middlemen. PBMs and insurers actually like high list prices, which result in larger rebates and higher profits for them.

This perverse system of hidden discounts hurts patients, who are typically required to pay co-insurance on a medicine’s list price.

Consider a vial of insulin with a list price of $300. A PBM might negotiate the net price down to $85. But if the patient’s insurance requires 25 percent co-insurance, she’d pay $75. If co-insurance were instead based on the net price, the patient would owe just $21.

The Trump administration just proposed a rule requiring PBMs and insurers to pass discounts to patients at the point of sale. Diabetes patients on Medicare could save $350 per year at the pharmacy counter if this proposal takes effect.

The much needed reform would force drug companies to compete based on who can offer the best price to patients, not who can offer the biggest hidden discounts to PBMs.

Sally C. Pipes is president, CEO and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Follow her on Twitter: @sallypipes

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